High IOF makes credit for families and companies more expensive and achieves savings

 

 The government decided to raise the IOF (Tax on Credit, Exchange and Insurance Operations, or related to Bonds or Securities) related to credit operations for legal and natural persons to raise R$ 2.14 billion and help fund the expansion of the Auxílio Brasil, a new income transfer program that should replace Bolsa Família.  

This change is negative for the resumption of economic activity and, by extension, for the performance of investment markets in Brazil, according to economists and market professionals.

The solution found by the government will make credit more expensive just when the basic interest rate, the Selic, is rising. The higher IOF and inflation, also at an increasing pace, will affect, on the one hand, companies that need working capital or financing to resume operations, and, on the other, consumer families seeking loans to buy goods or even exchange debts for cheaper ones.

For the executive coordinator of the Center for the Study of New Developmentalism at the Getulio Vargas Foundation (FGV), economist Nelson Marconi, the final cost of loans for companies and consumers should be higher.

By making credit more expensive, [the IOF] may contribute to slow down economic activity a little more.
Nelson Marconi, from FGV

For economist Roberto Troster, a specialist in the banking sector and former chief economist at Febraban (Brazilian Federation of Banks), Brazil is wrong in taxing credit and debt instead of taxing wealth. This reduces the ability of the economy to get out of the crisis it has been in since 2015.

The increase in the IOF is terrible. It's digging a big hole tomorrow to fill a small hole today. Growth expectations for this year and the next two are falling and will fall further.
Roberto Troster, from Troster & Associados

According to the Brazilian Federation of Banks (Febraban), the increase in taxes on credit, even if temporary, aggravates the cost of borrowing, particularly at a time when the Central Bank will need to raise the basic interest rate even more to contain the rise of inflation.

The result is a disincentive to investments and more costs for companies and families that need credit. This increase in the IOF is a factor that hinders the economic recovery process.
Febraban, in note

For the chief economist of the National Association of Credit, Financing and Investment Institutions (Acrefi), Nicola Tingas, the increase in the IOF comes at an inappropriate time because the economy already shows signs of growth accommodation and a drop in the pace for next year, with GDP ranging from 0.5% to 1%.

The cause is noble, but it should be being financed by spending cuts and not raising taxes. Nicola Tingas, Acrefi

IMPACT ON STOCK EXCHANGE AND DOLLAR

For the chief economist of the digital bank Modalmais, Alvaro Bandeira, the practical and immediate effect of the increase in the IOF is to make credit more expensive, which aggravates an already adverse situation because of the rising Selic rate and accelerating inflation.

This combination of higher interest rates and inflation particularly hits smaller companies, which lack capital and are having greater difficulty obtaining credit, as well as households that need credit.
Alvaro Bandeira, from Modalmais

According to the stock market specialist, this combination of factors directly affects publicly traded companies that depend on the most popular domestic consumption.

For the economist and partner at BRA Investimentos, João Beck, the increase in the IOF is a portrait of the government's inability to negotiate for better outcomes. According to him, the sectors more linked to domestic consumption will be more harmed because household consumption will be impacted.

Companies linked to the food and semi-durable goods sector will be the most impacted, as well as those linked to credit, such as vehicles and real estate.
João Beck, BRA Investimentos

For Ohmresearch analyst Júlio Hegedus, the worst thing about this decision is the government's improvisation, something that sends a signal of the public administration's incapacity to cope with spending and fiscal policy. This signal increases the degree of uncertainty among market agents.

It is an untimely decision to cover a hole, using a workaround. The impact of the IOF will fall on personal credit, such as the card. In companies, they will pass it on to the final cost.
Julio Hegedus, from Ohmresearch

Foreign exchange market specialist Sidnei Nehme, director of NGO Corretora de Câmbio, pointed out that the IOF may not have a direct impact on the cost of the market's dollar rate, but it should raise the costs of imported products.

In an intensely inflationary environment, it is a new element that causes a rise in prices, which burdens imported products and credit in general, and whose repercussions will be passed on to the population.
Sidnei Nehme, from NGO Corretora

For the  founding partner  of Fatorial  Investimentos, Jansen Costa, the increase in the IOF also influences the market and interest rates in some way, because higher credit prices may lead the Central Bank to withdraw part of the Selic increase, as the tax per se only, it raises the interest rate practiced in the economy.

The increase in the IOF impacts the interest curve and tends to reduce the Selic rate hike.
Jansen Costa, Factorial Investments

When contacted, the Ministry of Economy said that it would not make any comment beyond what was already exposed in the  note , according to which "the decision was taken due to compliance with fiscal rules".

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https://economia.uol.com.br/noticias/redacao/2021/09/17/aumento-de-iof-atrapalha-crescimento-e-rebate-no-mercado.amp.htm

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